The Fading Day-of-the-Week Effect in Developed Equity Markets

ABSTRACT The day-of-the-week effect, one of the most widely documented anomalies, has revealed that security returns tend to be significantly higher on some days of the week relative to other days. If the efficiency of markets improves over time, then the day-of-the-week effect may have faded away in recent time periods. This paper investigates the existence of this anomaly in the world's 23 developed equity markets over the last 22 years. The findings show that the day-of-the-week effect clearly was evident in the vast majority of developed markets during the 1980s, but it appears to have faded away in the 1990s. These results imply that increases in market efficiency over long time periods may have dissipated the effects of certain anomalies in more recent years. INTRODUCTION A substantial volume of research on security price behavior has identified a number of persistent seasonal patterns commonly known as calendar anomalies. According to these seasonal anomalies, the tendency exists for securities to display systematic patterns at certain times like days, weeks or months. One of the most widely documented anomalies is the day-of-the-week effect, according to which the security returns are significantly higher on some days of the week relative to other days (see e.g., Aggarwal & Tandon, 1994; Barone, 1990; Cross, 1973; Lakonishok & Smidt, 1988). Some studies showed that the average return for Monday is significantly negative for countries like the United States, the United Kingdom, and Canada (see e.g., Aggarwal & Schatzberg, 1997; Balaban et al., 2001; Flannery & Protopapadakis, 1988; French, 1980; Gibbons & Hess, 1981; Keim & Stambauch, 1984; Kohers & Kohers, 1995; Pena, 1995; Pettengill, 1985; Rogalski, 1984; Schwert, 1983; Smirlock & Starks, 1986; Solnik & Bousquet,1990). In contrast, for several Pacific Rim countries, the lowest rate of return tends to occur on Tuesdays (see Brooks & Persand, 2001; Davidson & Faff, 1999; Dubois & Louvet, 1996; Jaffe & Westerfield, 1985). The literature offers a number of possible explanations for the existence of the day-of-the-week effect, (see e.g., Keim & Stambauch, 1984; Miller, 1988; Wilson & Jones, 1993). However, most of the evidence centers around negative news releases over the weekend (e.g., Berument & Kiymaz, 2001; Penman, 1988). While most research supports the existence of a day-of-the-week effect, some offer contradictory evidence. For example, Connolly (1989) and Chang et. al. (1992) submitted evidence to suggest that sample size and/or error term adjustments render U.S. day-of-the-week effects statistically insignificant. These day-of-the-week findings appear to conflict with the Efficient Market Hypothesis since they imply that investors could develop a trading strategy that takes advantage of these seasonal regularities. However, once transaction costs and time-varying stock market risk premiums are taken into account, it is not clear that the predictability of stock returns translate into market inefficiencies. Focusing on the returns in Korea and the United Kingdom, two recent studies have suggested that starting in the 1990s, the day-of-the-week effect has disappeared in these countries (e.g., see Kamath & Chusanachoti, 2002; Steeley, 2001). If markets have become more efficient over time, seasonal anomalies such as the day-of-the-week effect may have gradually faded away in more recent periods. Given the possible evolution of this seasonal over time, renewed attention to this topic seems warranted. Thus, the purpose of this paper is to test for the existence of this anomaly in the world's developed equity markets over the last two decades. Specifically, the daily returns for the indices of the 23 MSCI-designated developed markets for the period from January 1980 through June 2002 are examined for the continuous presence of this regularity. …

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